US fund neutral on MSCI China and bearish on yuan

BNY Mellon Investment Management has turned neutral on mainland stocks and bearish on the yuan, citing weak economic data for reinforcing its pessimism about industrial outlook and business confidence.

The US money manager, with US$1.9 trillion in assets under management, now suggested a neutral position on the MSCI China Index, compared with its earlier overweight call, Aninda Mitra, the Singapore-based head of Asia macro and investment strategy, said in a report.

BNY Mellon recommended shifting to stocks in Thailand and Singapore as proxies to China’s reopening, which stood to benefit from outbound travel and private capital flows and were less susceptible to geopolitical risks, he said.

The firm has joined Citigroup and Jefferies Financial Group in lowering its recommendation on mainland stocks after economic data fell short of estimates across the board last month and producer prices dropped at the fastest pace in three years.

The sentiment on Chinese assets has soured recently, with the yuan breaching the 7 level against the US dollar and foreign investors turning into net sellers of mainland stocks.

“Alongside weakening activity, intensifying economy-wide disinflation and weakening business and investor confidence are particularly troubling,” Mitra said.

The 3.6 per cent decline in producer prices last month was a reflection of the nation’s industrial overcapacity and housing inventory, which would chip away at corporate pricing power, he said.

Meanwhile, the price-earnings multiple would continue to be suppressed by Beijing’s crackdown on the private sector and the simmering tensions between the United States and China, he added.

The MSCI China Index, which tracks 717 onshore and offshore stocks with a combined market value of US$2.3 trillion, dropped by 7.4 per cent this year after a rally spurred by the reopening trade late last year fizzled out.

The gauge, whose biggest constituents are Tencent Holdings and Alibaba Group Holding, is valued at 10.8 times projected earnings, compared with the average of 12.4 times over the past decade, Bloomberg data shows. Alibaba owns the Post.

The Hang Seng Index is about 2 per cent short of entering a bear market and the CSI300 Index of yuan-traded stocks has erased this year’s gains.

Foreign investors have dumped almost 9 billion yuan (HK$9.96 billion) of mainland stocks through the exchange link with Hong Kong this month and are on course for a second consecutive month of net outflows, according to Bloomberg data.

BNY Mellon lowered the growth of full-year earnings per share for companies on the MSCI China Index to between 5 and 6 per cent from a range of 7.5 and 8 per cent.

“We do not suggest underweight,” Mitra said. “MSCI China’s cheap valuations and its lack of correlation with slowing developed market economies suggest a ‘hold’ would be more appropriate.”